High Demand, Low Supply, High Prices Make It A Bull Market For Car Dealerships

Car dealerships are buying each other up at a record pace.

That’s a sure sign, dealers are confident in the long-term health of the auto retail industry, despite some potential risks, including the switch to electric vehicles.

“The next two to three years should be golden years for car dealers,” said Alan Haig, president of Haig Partners, Fort Lauderdale, Fla., a firm that brokers dealership mergers and acquisitions, in a phone interview.

Haig said in a report on dealership M&As published March 31 that 640 dealerships changed hands in 2021, more than double the pre-pandemic level of 299, in 2019, and up 86% vs. 2021.

In the short term, dealership profits — and consumer prices for new cars and trucks — are through the roof, because of a persistent shortage of new vehicles, combined with high consumer demand.

In turn, the COVID-19 pandemic, plus a shortage of computer chips used in vehicle manufacturing, plus other supply-chain problems are responsible for the new-vehicle shortage. Taken together, those factors are a “perfect storm” in favor of dealership profits, Haig said.

Not only that, high prices and high profitability are likely to persist, even after auto production starts to recover, because there’s so much pent-up demand, he said.

Citing industry estimates, Haig said that by the end of 2022, production shutdowns could amount to nearly 7 million cars and trucks that didn’t get built, in 2020, 2021 and 2022 combined, even though there was plenty of demand.

“And the shelves are empty,” at new-car dealerships today, he said. Haig estimated by the pent-up demand is met, it could take around three-and-a-half years for auto production to get back into balance with demand. “That’s an incredibly long time for these profits to remain elevated,” he said.

Still, there are potential threats on the horizon. The No. 1 risk is the switch to electric vehicles, and with that, an increase in the number of automakers that want to sell EVs direct to the public, without a franchised middleman, the way Tesla does.

There are even some indications that established, legacy brands are flirting with direct sales, too. In the long run, Haig said dealers could survive direct sales by cutting expenses, including dealership head count, and the need to build and maintain large, fancy dealerships, if the customer is mainly at the dealership just to take delivery.

Dealers have an ace card in favor of dealerships, because franchised, new-car dealerships also serve as a nationwide service and parts network for their brand’s electric vehicles — something those new companies lack, Haig said.